Published Fri, 08 Jun 2018 12:39:56 on Interactive Investor
Over three decades ago an academic paper revealed a simple yet highly effective way to improve investors' odds of stockmarket success: avoid the big names and instead identify tomorrow's giants.
The study, carried out by Rolf Banz in 1981 at the University of Chicago, first documented what is known today as the 'small firm effect' or 'small-cap premium', whereby over the long term smaller-sized shares deliver much higher returns than their larger rivals.
Banz's study looked at the US stockmarket, but other studies over the years have drawn the same conclusions for other markets, including the UK. Research carried out in 2015 by the London Business School, for example, found that over 10-year periods since 1955, smaller firms outperformed larger companies five times out of six.
On the surface, though, fund investors don't seem convinced that small is beautiful. Over the past decade fund flows into the Investment Association's (IA's) UK smaller companies sector have been lukewarm, with money exiting the sector during periods when volatility has picked up.
The UK referendum on leaving the European Union in 2016 was a case a point, with outflows from the sector. Some investors have not returned: since July 2016, net outflows stand at £107 million, part of a trend that has seen UK equities in general being given the cold shoulder.
But according to Harry Nimmo, the small cap veteran who since the turn of the millennium... Read more